MEDICAL MARIJUANA INDUSTRY STRUGGLES AMID COMPETITION, REGULATION

A system that mimics daylight illuminates Lono Ho'ala's grow room at
the Eagle's Nest Wellness Center in Cascade, where cannabis plants as
tall as corn stalks are pampered in a temperature-controlled and
specially ventilated environment that's laced with carbon dioxide to
accelerate growth.

Ho'ala is patient, waiting until leaves start to turn yellow to
harvest the sticky, ripe buds, the only part of the plant that's used
to make the medicinal products that he sells.

Lush green buds may be the only thing America's latest cash crop is
yielding: Profits from growing and selling cannabis are vapor thin,
owners of local medical marijuana businesses say.

Dispensaries and grow operations have been scrambling to meet state
and local regulations that will go in to effect Friday and spending
tens of thousands of dollars in the process. This is leading to a
shakeout in the industry as weaker players are forced to close or
sell. In Colorado Springs, the number of active sales tax licenses
issued by the city to dispensaries and grow operations has declined
from a high of 205 in June of 2010 to 160 in April.

"A lot of people thought they were going to get into a lot of money"
in this business, said Tanya Garduno, president of the Colorado
Springs Medical Cannabis Council. "With the market saturated, there
wasn't a lot of money out there, and the fees slowly killed them."

Nevertheless, dispensary operators who came in with clear heads and
sound business plans are surviving, Garduno said, and the recent
extension of a moratorium on new marijuana-business-license
applications has created a booming market for licenses from businesses
that are closing.

Basic supply and demand is one of the biggest challenges facing the
industry. Medical marijuana dispensaries are required to grow 70
percent of what they sell, which has created a glut of supply among
individual caregivers who used to provide the dispensaries with
products, Ho'ala said. That's driven down prices, and some centers are
using the black market to boost revenue to stay in business, Ho'ala
said.

"Most of the dispensaries are already hurting," he said. "Some are
selling it out of state to survive."

Ho'ala said 3.5 grams of medical marijuana sells for what 1 gram cost
a year ago.

Market saturation was another cause of decreased prices, said Tony
Carmendy, an owner of Pikes Peak Alternative Health and Wellness south
of downtown Colorado Springs.

"Centers are trying to keep patients coming to keep up with the money
needed for city fees, state fees, attorney fees, equipment and
employees," he said.

Profits are negligible, business owners say.

Judy Negley, who owns three dispensaries in Colorado Springs called
Indispensary, said the businesses "are meeting our
expectations."

"We're covering our bills, and that's what we expected," she said.
"Our first and foremost goal was not to chase a dollar. We're here
because of the moral imperative and we knew it would take a
significant investment."

Negley and her business partners, who also own three Independent
Records stores in Colorado Springs, haven't advertised but have
attracted enough patients to sustain their operations, Negley said.

"Colorado Springs has had one of the highest concentrations of
dispensaries in the state, and we're seeing the market sorting itself
out as people can't afford to come into compliance" with the various
regulations, she said.

Because medical marijuana is still illegal on the federal level - even
though 15 states including Colorado have legalized its use - marijuana
providers face unique business challenges. The federal government uses
what center owners call "back door methods" to get the businesses to
close by putting pressure on the services dispensaries use. For
example, last month, without notice, Ho'ala said his credit card
processing system was cut off overnight, as American Express announced
it would no longer accept transactions for medical marijuana
nationwide, and other companies followed suit.

Carmendy said that after federally insured banks quit doing business
with medical marijuana sellers and growers last year, he had to switch
banks and could find only one private local bank in Colorado Springs
that would take his account.

"We had been doing business with Wells Fargo for two years, and they
told us to leave," he said.

Current tax laws require medical marijuana businesses to report all
revenue, but they deny deductions, meaning taxes must be paid on all
income with no write-offs.

"If that sticks, we'll see every dispensary closing," Ho'ala said.
"The law is oriented like it's an evil devil weed, and you're treated
like a criminal because the pharmaceutical companies and drug cartels
don't want the medicine legalized."

And there are mounting costs for applications, licensing and
compliance with regulations that include new scales, video cameras and
badges for employees.

"They're charging us to police the industry, which affects our ability
to produce for the patient," Carmendy said.

Like the liquor industry, state and local fees charged to medical
marijuana businesses cover costs of law enforcement, application
processing and other expenses in order to prevent tax money from being
used.

Julie Postlethwait, spokeswoman for the Colorado Department of
Revenue's Medical Marijuana Enforcement Division, said there have been
growing pains for the industry and regulators. The division is in the
process of verifying license applications, even while it hires what
will eventually be a force of about 50 inspectors and support staff.

"You have to remember that the industry was alive and well for 10
years before we came on board," Postlethwait said. "Basically, the
horses are out of the barn and we're getting them in the right pasture."

Rules on ownership and growing have forced many operators into hasty
business marriages, and those shifting alliances slow the licensing
process, she said. It may be the end of the year before the division
has a good handle on how many medical marijuana providers will make it
all the way through the licensing process.

Still, Postlethwait said, most providers are bending over backward to
work with the state and are eager to be fully recognized by state law.

"It's been really refreshing," she said. "I kind of expected
resentment. This is really valuable to them - they want to be regulated."

Rob Corry, a Denver attorney who specializes in marijuana issues,
disagrees. He said the regulatory regime is stifling an industry still
taking baby steps and is stigmatizing businesses that are obeying all
the rules.

"It was way too much too soon," he said of the state licensing
requirements. "This was a brand-new sector that should have been able
to spread its wings first."

It's a mixed bag, Garduno said. The licensing is a huge headache, but
it also means that Colorado's dispensary owners know where they stand
with regard to state law, which gives the industry the opportunity to
mature, she said.

"The way that Colorado has put their laws together, while they're very
difficult, restrictive and overreaching, they also give us a way to
function," Garduno said. "We're just hoping that we can stay in
business and operate legally. We'd love to get out of this constant
battle mode and this constant defense mode."

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HIGHLIGHTS OF THIS SERIES:

SUNDAY: Area business owners explain some challenges they've faced
since opening, including market saturation, paying fees and complyng
with regulations.

MONDAY: Learn about minors who are prescribed medical marijuana and
about barriers to research that would be required to persuade
lawmakers to rethink pot laws.

TUESDAY: A look at federal raids on dispensaries; a push to get full
legalization on the 2012 ballot; and who and how many in the industry
have broken laws.